Is Crowdfunding Really a Good Idea for Innovation?

12/13/2017 01:39 pm ET

Here’s a head-scratcher for you: according to new research, if you refer to your product or idea as both “novel” and “useful” in your crowdfunding campaign, your funding will be lower than it would if you just declared your product to be either “novel” or “useful.”

This nugget of information is the latest takeaway from research on the crowdfunding phenomenon. While entrepreneurs who turn to crowdfunding are perceived by many to be innovative and forward-thinking, these platforms don’t appear to be effective for attracting funding for truly innovative ideals.

People LOVE Crowdfunding

In 2016, crowdfunding capital exceeded funding from venture capitalists for the first time and is predicted to reach the $93 billion mark worldwide by 2025. This was spurred on after Congress passed legislation which made it easier for crowdfunders to attract all types of investors – not just so-called “accredited investors” with incomes over $200,000 or a seven-figure net worth.

Perhaps the biggest advantage crowdfunding has over VC is the speed at which an enterprise can be funded. While funding from VC investors tends to take years to secure a deal, a crowdfunding campaign can raise substantial sums of money in just a a couple months. As a result, many entrepreneurs are turning to crowdfunding platforms for their initial round of “seed money.”

Another lesser-known benefits of crowdfunding is that women and people of color, who tend to not have the networks to pitch venture capitalists, currently receive just one out of every $25 doled out by equity investors. These entrepreneurs now have a more attractive funding option for their projects and may be able to avoid having to wage an uphill battle for VC money.

The Downsides of Crowdfunding

Just because crowdfunding increases the availability of funding sources, it doesn’t mean that this process requires less effort than pursuing venture capital or just launching the business. Indeed, you might discover it could take two-years or more to pitch to potential investors – often without knowing the level of funding these investors are willing to commit.

Launching a crowdfunding campaign is far from a sure thing. Seasoned investors exercise caution before throwing money at a startup on a crowdfunding site. That’s because there has been a wave of overvalued yet less stable investment opportunities that have found their way to crowdfunding sites (and maybe bilking investors out of thousands and in some cases millions of dollars). Needless to say, experienced investors are trying to avoid these flashy-yet-substantive projects.

What the Funding Future Holds

So what does the future relationship between crowdfunding and venture capital look like?

Right now, it appears that some VC investors are treating crowdfunding platforms a bit like “window-shopping” new projects. They watch various projects to see how successful they raise capital via crowdfunding and focus on the ones which seem to generate the most interest. It’s also common for startups to amass a combination of venture capital and crowdfunding in their efforts to generate enough money and expertise to run the business.

It’s safe to say that crowdfunding won’t corner the market on innovation despite its expected growth over the next decade. But the savviest business owners will discover ways to leverage the benefits of both venture capital and crowdfunding relationships with in order to increase their opportunities to launch in the marketplace with a readymade customer base.